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Infosys FY10: Betters expectations, but guides weak - Views on News from Equitymaster

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  • Apr 13, 2010 - Infosys FY10: Betters expectations, but guides weak

Infosys FY10: Betters expectations, but guides weak

Apr 13, 2010

Infosys has announced its FY10 results. The company has reported a 5% YoY and 4% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales grow by 4% QoQ in 4QFY10 and by 5% YoY during FY10. Growth chiefly led by higher volumes across business segments.
  • Operating margins decline by 1% QoQ during 4QFY10 on account of higher development and sales cost. Nevertheless, operating margins improve by 0.8% in FY10.
  • Net profits grow by 3% QoQ during the quarter helped by a rise in other income. During FY10, net profits grow by 4% on back of improved margins and sharply higher other income.
  • Adds 47 new clients and 3,914 employees (net) during the quarter. Total employee count stands at around 113,800 at the end of March 2010.
  • Recommends a final dividend of Rs 15 per share for FY10.
  • For the current fiscal (FY11), the management expects total income to grow by around 9-11% YoY while it estimates net profits to decline by 2% YoY.


Consolidated financial snapshot
(Rsm) 3QFY10 4QFY10 Change FY09 FY10 Change
Sales 57,410 59,440 3.5% 216,930 227,420 4.8%
Expenditure 39,570 41,550 5.0% 152,720 158,320 3.7%
Operating profit (EBDITA) 17,840 17,890 0.3% 64,210 69,100 7.6%
Operating profit margin (%) 31.1% 30.1%   29.6% 30.4%  
Other income 2,300 2,520 9.6% 4,730 9,900 109.3%
Profit before tax 20,140 20,410 1.3% 68,940 79,000 14.6%
Tax 4,550 4,410 -3.1% 9,190 16,810 82.9%
Profitafter tax/(loss) 15,590 16,000 2.6% 59,750 62,190 4.1%
Netprofit margin (%) 27.2% 26.9%   27.5% 27.3%  
No. of shares (m)       572.9 571.1  
Diluted earnings per share (Rs)*         108.9  
P/E ratio (x)*         25.5  
* On a trailing 12-months basis

What has driven performance in FY10?
  • Infosys recorded sales growth of 4% QoQ and 5% YoY during 4QFY10 and FY10 respectively. This was mainly aided by higher volumes (grew 7% YoY) particularly at the offshore business, Offshore volumes jumped by 9% YoY. However while billing rates remained stable at onsite projects, these declined by 5% for offshore during FY10. However, the decline in billing rates was curbed during the latter half of the fiscal. Infosys added 47 new clients during 4QFY10 (141 during FY10) thus taking the total number of active clients to 575.

  • Among its service lines, Infosys recorded the strongest performance in 'consulting and package implementation'(about 25% of sales) which grew by 16% QoQ during 4QFY10 and 3% YoY during FY10. However, its major business segment i.e., 'custom application development and maintenance'(40% of sales) shows a muted performance. The company also saw strong growth in infrastructure services, business process management and system integration services. With regards to its products portfolio (4% of sales), growth stood at 33% QoQ during 4QFY10 and 13% YoY during FY10. This was aided by 10 new deals for ‘Finacle’ during the quarter, taking the total deal count to 31 for FY10.

  • In terms of geographies, Infosys saw a strong growth in its largest market i.e., the US. It registered a growth of 3% QoQ and 9% YoY during 4QFY10 and FY10 respectively. However, the recovery appeared sluggish in the European markets where sales declined by 9% YoY during FY10. The Indian market, which still forms a negligible part of the company’s sales (just 1.4%), grew by 21% QoQ during 4QFY10.

    Revenue break-up
    Rs m 3QFY10 4QFY10
    Byservice offerings    
    Application development and maintenance 24,284 23,538
    Application development 10,219 9,986
    Application maintenance 14,065 13,552
    Business Process Management 3,387 3,685
    Consulting Services and Package Implementation 13,377 15,454
    Infrastructure Management 4,076 4,280
    Product Engineering Services 1,378 1,070
    System Integration 2,354 2,675
    Testing Services 3,732 3,923
    Others 2,583 1,843
    Total services 55,171 56,468
    Product revenues 2,239 2,972
    Total revenues 57,410 59,440
    By industry vertical    
    Insurance, Banking and Financial services 19,864 20,685
    Manufacturing 11,080 12,007
    Retail 7,521 7,727
    Telecom 9,300 9,094
    Utilities 3,502 3,448
    Transportation& Logistics 1,033 1,070
    Services 2,928 2,913
    Others 2,182 2,496
    By geography    
    North America 38,235 39,290
    Europe 13,319 13,374
    India 689 832
    Rest of world 5,913 5,944

  • Infosys added a net of 3,914 employees during 4QFY10. Its total headcount stood at 113,796 employees at the end of March 2009. The utilisation (excluding trainees) improved from 76.2% in 3QFY10 to 77.1% in 4QFY10. Attrition levels surged to 13.4% during 4QFY10 as compared to 11.6% during the previous quarter. Improvement in the job scenario resulted in a lot of voluntary attrition for the company.

  • Infosys' operating margins improved by 1% YoY during FY10. However, margins fell by 1% QoQ during 4QFY10. The company's efficiency in managing cost coupled with a favorable currency movement over the fiscal, aided its FY10 margins. The ramp up in hiring and increased sales and marketing expenditure resulted in margin contraction in 4QFY10.

  • Infosys reported a 3% QoQ growth in its net profits during 4QFY10. This was largely on back of 10% rise in other income. The company generated Rs 480 m through the sale of its investment in a US based firm, OnMobile Systems.

What to expect?
At the current price of Rs 2,776 the stock is trading at a multiple of 17.8 times our estimated FY12 earnings. During the conference call, Infosys' management appeared upbeat about the robust annual performance of the company across all major industry verticals. Having beaten its own FY10 guidance by a decent margin, the management believes that Infosys has emerged stronger from the downturn. Investing in its business and in recovery ahead of time enabled it to take advantage of the early hints of economic pickup. Increase in volumes compensated for a slight dip in pricing. The company's strategy of focusing on transformation deals appears to be paying out. Its revenues from consulting and system integration kind of projects saw a significant surge during the fiscal. This strategy will result in decrease in proportion of revenues generated from the basic application development and maintenance deals. Infosys won 5 large deals during 4QFY10, 4 out of which are end-to-end IT transformation projects.

The management expects Infosys' topline to increase by 9% to 11% in FY11. It also expects the earnings per share to increase or decrease in the range of 2% in FY11, factoring in the unfavorable fluctuation in currency, increase in employee-cost and investment in business. The company plans to implement on an average a 14% salary-hike at offshore and a 2% to 3% salary-hike at onsite. This is expected to put pressure on margins for FY11, especially during the initial quarters. Infosys plans to recruit around 30,000 employees in FY11 in order to fuel its future growth. However, the company has no specific plans for major acquisition despite having a huge cash reserve of US$ 3.5 bn. Nevertheless, it has hinted at being open to smaller acquisitions in European markets particularly in consulting and other high-end segments. At these levels, we maintain our 'Hold' view on the stock.

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